Tuesday, July 31, 2012

What is the impact of interest rate on investment?

Overall, businesses invest less when interest rates increase, because the value of borrowing cash will increase. Much business investment is funded wholly or partially by credit. Moreover, a rise in interest rates means companies usually have to devote more resources to paying interest on their existing debts, which lowers the quantity offered for investment. This is often a serious reason why the stock market tends to say no on news of rate will increase -- lower investment equals lower potential growth for businesses in the near future.

As for the British Pound, it depends on whose rates we tend to are talking regarding. In general, when a rustic raises the interest rate for its currency, we'd expect that currency to achieve in price relative to alternative currencies. This is often because a rise during a currency's interest rate makes it more valuable to hold as an investment, attributable to the upper rates that banks pay on deposits, borrowers pay on bonds/loans, etc. When the currency becomes more valuable, demand for it ought to increase, and thus its price (price) ought to go up. In real life, these relationships aren't thus clear cut; values usually do shift in response to interest rate changes, however the value shifts usually lag behind the rate changes (sometimes for many years), and alternative complicating factors can 'distort' the value that we'd expect purely from interest rate effects

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